As is now common knowledge, some of the world’s most powerful countries are insolvent due to ever-increasing sovereign debt. At this point, the economies are being held together through only one factor: continued faith in the currency by the average citizen. As soon as that faith disappears, the economies will crash.

Not surprisingly, the leaders of these countries and their close associates (particularly the banks) are actively seeking means by which they can escape the effects of the crisis they have created and still retain some sort of control.

For some time, I’ve predicted that one way in which they will accomplish this will be the elimination of cash, that in order to prevent a run on the banks in which the average citizen simply removes his money from the system, such a removal would be made impossible by ending the existence of bank notes. It would be replaced with an electronic currency system, so that the only “cash” that exists is a credit in a bank account.

When this prediction was first suggested, it seemed to many to be both alarmist and ridiculous. Mankind has always had hard currency in some form, something physical that could be held in the hand. But with computerisation, the elimination of physical currency is possible.

Banks, with the support of legislation, can require that all transactions (even the purchase of a candy bar) be electronically performed by the account holder. Once this has been achieved, two other advantages (to the bank, not to the account holder) become possible.

First, paper currency can be eliminated, which assures that, no matter how bad things get, account holders can’t remove their cash from the bank and stuff it in a mattress at home, since no physical cash exists. Second, banks could then charge account holders interest for their savings accounts, since transactions could take place only through the banks.

Now the concept of electronic currency is no longer the stuff of fairy tales. Most of the world’s governments have passed laws restricting the amount of cash an individual might use. Those who use cash over the designated amount are, in some cases, harassed or even investigated (generally for money laundering or drug dealing).

Ecuador’s War on Cash

In December 2014, Ecuador instituted its Sistema de Dinero Electrónico (SDE), the world’s first government-controlled electronic monetary system. (Other countries have electronic banking systems, but they are not state run.) And it is US-dollar based.

Back in 2000, Ecuador adopted the US dollar as its official currency, dumping the sucre, which, as a result of hyperinflation, had become devalued to the point of 25,000 to one US dollar. So, the Ecuadoran government scheme will be dollar based.

The system is being promoted as a new, easier way to make payments (either by card or cell phone), eliminating the need to carry cash and making it harder for thieves to steal.

It is also being touted as a way to benefit the poor, although no reasons are being offered as to why this might be so. (If this were their true goal, Quito officials might instead allow for competing private-sector systems, to drive down costs.)

The system is being introduced piecemeal. At present, you can pay for a taxi and some services with the SDE, as well as send money between individuals. By year’s end, it will be possible to pay your taxes with it.

To date, each of the steps taken by Ecuador follow the playbook as I originally put forward. Should Ecuador continue to follow the prediction, when the SDE reaches the point that virtually everyone in the country has an account and is making the majority of their payments by either a debit card or cell phone, the government will announce that paper currency is to be eliminated.

The explanation given at the time might be that cash would no longer be necessary and would be a drain on the economy. (Ecuador spends three million dollars annually replacing worn-out bills.)

Sceptics both within and outside of Ecuador have suggested that the new system may simply be a way of dumping the dollar, but, if anything, the Ecuadoran government is enhanced by the continued use of the dollar.

First, the dollar has allowed relatively low inflation and low interest rates. Second, the dollar is less likely to hyperinflate than a reinstated sucre. Third, the sceptics are overlooking the fact that, once the dollar is electronic only, Ecuador never need buy dollars again. The electronic dollar would be a dollar in name only. In reality, it would not exist. It would be an electronic concept.

(That last bit will take some getting used to, not only in Ecuador, but worldwide.)

Monkey See, Monkey Do

As Ecuador demonstrates the workability of its electronic system, I believe that neighbouring countries will jump on the bandwagon quickly. Each government will say to itself, “Government control of all monetary transactions? Where do we sign up?”

An additional benefit will be the apparent stability of the US dollar. As long as the dollar holds up, governments like Ecuador (and other countries, such as Uruguay and Argentina, that use the dollar as a second currency) will gladly base deposits in dollars.

So, that covers the larger, critically indebted countries, plus the Third-World countries. What of the smaller, prosperous countries whose currencies are presently sound?

It’s entirely possible that smaller, more stable countries, such as Bermuda, the Cayman Islands and Hong Kong, will get on board with the electronic system. They’ll need to, in order to continue international banking.

However, if their own currencies are stable, there’s no real reason for them to eliminate their own currencies for local usage. These currencies may therefore continue, although there’s the danger that either the banks (realising that they can only charge interest on deposits, not on cash kept at home) or governments (who, above all, seek control over their people and recognise monetary control as a primary control) may very well opt to eliminate paper currency.

But is the loss of physical currency really such a bad thing? After all, the elimination of cash does create convenience and might just limit theft in the world to some degree.

Yes, it is indeed quite a bad thing. The overriding effect that the elimination of cash will have on people will be that they will lose their freedom of monetary movement. They will be subject to government and banking surveillance of every transaction and, increasingly, will be subject to legislation that limits currency movement.

Once this point is reached, governments will be free to move to a stage in which they declare that money is not the possession of the individual or company. It’s the possession of the government and the government “allows” the public to use its currency in order to conduct commerce. As such, individuals and companies had best “behave,” or they might find the privilege taken away and the money confiscated.

Of course, the reader may well find this final step to be beyond the pale, even for today’s overreaching governments. Just a year ago, the very concept of a War on Cash itself was considered to be a mere fantasy, yet we are already clearly transitioning into the End of Cash.

And So…

And so, anyone who wishes to retain control of his own economic life will soon be facing the realisation that:

All currency (in most, if not all countries) may soon be held solely in banks and transacted solely through banks.

All currency that is in banks will be subject to bank and government scrutiny, increasing bank and governmental controls and limitations and possible confiscation and increased taxation.

All wealth that remains within the control of the individual will be wealth that is held in a non-currency form and held outside banks.

The field for such ownership is becoming increasingly limited. It consists primarily of precious metals and real estate, and even those stores of wealth are truly safe only if located in a jurisdiction that is not on the verge of insolvency and whose government is both stable and relatively benign.

Such jurisdictions do exist, but “cash,” as it exists today, must be moved out of hazardous jurisdictions and converted to a safer form of wealth protection before the final legislations have been passed, making cash illegal.

Editor’s Note: We’ve discovered one of the easiest and most convenient ways to own and store physical gold and silver offshore (in places like Singapore and Switzerland in a non-bank private vault). Find out how you can internationally diversify your precious metals by downloading this guide.

This morning both the NYSE broke (canceling all open orders) and China outlawed selling stocks for large investors.

These two items seem completely unrelated… however, the reality is they are both based on a them we outlined back in May 2015.

That theme is as follows: that as the next Crisis unfolds, it will more and more difficult to get your money out of the financial system.

The reason for this concerns the actual structure of the financial system. As we’ve outlined previously, that structure is as follows:

1) The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion.

2) When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.

3) In contrast, the money in the US stock market (equity shares in publicly traded companies) is over$20 trillion in size.

4) The US bond market (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion.

5) Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.

6) Unregulated over the counter derivatives traded between the big banks and corporations is north of$220 trillion.

When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).

Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system. Suffice to say, one of the biggest concerns for the Federal Reserve is what would happen if a significant percentage of investors decided to move into physical cash.

Indeed, this is precisely what happened in 2008 when depositors attempted to pull $500 billion out of money market funds.

A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

As a result of this, the Fed and the regulators are looking to implement moves that would make it much harder to move money OUT of the markets and into cash.

Consider the following… the SEC has actually implemented regulations to stop withdrawals from happening should another crisis occur.

The regulation is calledRules Provide Structural and Operational Reform to Address Run Risks in Money Market Funds. It sounds relatively innocuous until you get to the below quote:

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period…

Also see…

Government Money Market Funds – Government money market funds would not be subject to the new fees and gates provisions. However, under the proposed rules, these funds could voluntarily opt into them, if previously disclosed to investors.

In simple terms, if the system is ever under duress again, Money market funds can lock in capital (meaning you can’t get your money out) for up to 10 days. If the financial system was healthy and stable, there is no reason the regulators would be implementing this kind of reform.

This is just the start of a much larger strategy of declaring War on Cash. Make no mistake, it is a full scale war that will involve regular tactics such as “breaking” the market so you cannot sell stocks… all the way up to the nuclear option: OUTLAWING physical cash altogether.

According to Colin Lancaster, senior managing director with Balyasny "we now have another 48 hours of calm before things really start happening", and the punchline:"situation could then break down as banks stay closed, ATMs will run out of cash Tuesday or Wednesday, uncertainty grows and rioting possible."

3) Tsipras tells the media and Greek citizenry that the EU is evil and is attempting to enslave Greece.

This process has been maintained for over five years now. This only further illustrates one of my central themes: everything in Europe is about politics.

Europe as a whole is socialist in nature. You will never hear a discussion of “how involved should the Government be in the economy?” in most of Europe; it is just assumed that the Government should always be involved a large degree.

The question is whether it should be a lot (the public sector accounts for 30% of jobs in Germany) or almost entirely (the public sector accounts for 56% of jobs in France).

When more than one in three people are employed by the public sector in one form or another, everything is driven by politics.

The best example of this, of course, is Greece.

Greece has been and remains a fiscal basket-case for three simple reasons:

1) The Government attempts to employ as many people as possible even if it makes absolutely no sense to expand the Government workforce.

2) The Government pays WAY above what the work requires (on average public sector wages are 150% of private sector wages and most employees receive pensions equal to 92% of their salary at retirement).

3) Greek culture not only embraces, but celebrates tax evasion (so there is little Government revenue to finance all those overpaid bureaucrats).

Consider the Greek metro system. It takes in €80 million in annual ticket sales… and spends over €500 million in salaries.

There is a word for an entity that spends over SIX times its annual revenues on employee salaries… it’sbankrupt.

This sort of scam is endemic in Greece. Anyone from pastry chefs to hairdressers and other services-based sectors can retire at age 50 and receive a pension equal to 95% of their salary.

Suffice to say, the Government payouts are extreme.

Unfortunately, Greek taxpayers don’t want to fund it. Greece has a population of 12 million. Less than 5,000 of these individuals report taxable income of more than €90,000.

Put it this way, less than 0.01% of the Greek population claims it makes more than €90,000 per year in salary. This for a country that has over 60,000 individuals with investments of over €1 million… and those area simply the individuals willing to admit it!

The effort that goes into this subterfuge is staggering. In 2010, the Greek tax authorities began using satellite imagery to target Athens homes with swimming pools (a sign of wealth). Only 324 Greeks claim to have such homes in Athens. The satellite study found nearly 17,000 homes with pools before an enterprising Greek began selling pool covers that look like a normal lawn.

Simply put, in Greece we have a bloated bureaucracy that pays exorbitant salaries and pensions in a culture that goes to great lengths to hide its wealth/pay taxes.

Greece however is not the REAL issue for Europe. The REAL issue concerns the derivatives trades that are backed by Greek debt.

Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.

Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as collateral for hundreds of trillions of Dollars’ worth of trades.

The global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Greece… are one of, if not the primary collateral underlying all of these trades.

Greece is not the real issue for Europe. The entire Greek debt market is about €345 billion in size. So we’re not talking about a massive amount of collateral… though the turmoil this country has caused in the last three years gives a sense of the importance of the issue.

Spain, by comparison has over €1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut on them would trigger systemic failure in Europe.

In short, the EU’s worst nightmare is a debt haircut or debt forgiveness for Greece because it opens the door to Spain or Italy asking for similar deals down the road.

"Wake up people of the world and investors. Greece will come to your neighborhood very soon, maybe not this year, but next year or whenever it is, because the world is over infected. And defaults will follow, or they will have to create very high inflation rates."

That's Marc Faber's message to all of those who may still think that Greece doesn't matter in the grand scheme of things. In an interview with Bloomberg TV, Faber talks Greece, China, and of course the Fed.

On Greece:

And everybody knows in the world that Greece cannot pay its debt at the current size. So what will happen, in my view, is either Greece will leave the EU and will suffer very badly for a few months, maybe even longer. There will be a cash shortage. Or the EU, and the ECB and the IMF will have to cut a significant haircut. And Tsipras proposed a haircut of something like 30 percent. I don't think that's enough. I think they will need a haircut of at least 50 percent.

I think the likelihood of contagion is very high. And I have to say when you have a borrower, you also have a lender. And it's actually, in my view, amazing how the EU kept on pumping money into Greece, partly also to bail out their own banks. And suddenly now the debt is no longer manageable.

And I would say, wake up people of the world and investors. Greece will come to your neighborhood very soon, maybe not this year, but next year or whenever it is, because the world is over infected. And defaults will follow, or they will have to create very high inflation rates.

Over the weekend, we showed why contrary to unfounded speculation that Greece is entirely contained, there are still extensive linkages when it comes to the fallout a Grexit would reap if not directly on private commercial banks which over the years managed to offload their Greek exposure to the Europe's taxpayers....

... but on the sovereign economies of the Eurozone as well as the ECB, at first via the EFSF, then also via the SMP, the MRO, Target 2 and so on.

Overnight, Barclays took this analysis and also showed the absolute national euro exposure to Greece broken down by bailout program and also as a % of respective host nation's GDP. What it found is the following:

And here is what it looks like when we redo our prior chart showing just European Grexit exposure via EFSF, to total sovereign exposure as a % of GDP. The total amount in question: €341 billion, or just about 3.4% of the €10 trillion in notional European GDP.

But wait, rules-based Europe has "firewalls" now, all laid out and proper, so there can't possibly be contagion.

Only that's not true: for example, two years after introducing the OMT, the ECB still does not even have a regular term sheet laying out the rules of what the purpose of the OMT is aside to be some massive, amorphous "whatever it takes" bazooka. And as for the ECB's QE, it is all downhill from here as net issuance in Europe trickle to a halt, and the ECB risks crushing an already illiquid bond market by monetizing even more of it. Of course, it could engage in outright stock monetization but that would be the signal that the end of the current system is truly near.

As for "rules-based", we'll just leave that to the ECB which just hiked Greek bank collateral effectively admitting the banks are insolvent, but not too insolvent, because now the ECB is officially and without doubt a political entity whose only purpose is to further political agenda.

But that's just the beginning, and as Barclays cautions investors have largely taken the view that even if the worst case scenario did unfold, the impact on portfolios would be manageable. At this point Barclays warns that it is perfectly plausible that this Sunday’s “no” vote may not follow the benign narrative that markets have largely adopted.

Below are some of the scenarios where the contagion will be worse than any algo, not to mention central banker, expects:

The backstops are not entirely infallible

Some of the backstops, if needed, are either untested or incomplete. One example might be the new banking union. At present, the €55bn resolution fund is still 95% unfunded, deposit guarantee schemes are still mostly ex-post funded and there is still no pan-European deposit insurance. More importantly, holdings of peripheral debt on domestic bank balance sheets are rising substantially in recent years. In Italy and Spain, for instance, domestic government bonds as a percent of total bank assets have risen from 1.5% and 2.3% respectively in 2009, to 6.5% and 7.8% at end 2014 and February 2015 respectively. Any period of prolonged, significant peripheral stress would almost surely lead to some, perhaps significant, widening in bank credit spreads.

As for the ECB’s OMT programme, it has never been tested and it is not quite the pure “lender of last resort” backstop many in the market have come to believe it to be. To start, ECB OMT purchases come with significant conditionality. Any country seeking this assistance must apply for a programme, which would almost surely come with fiscal and structural reform prescriptions.

Greek exit and an official sector default would be new precedents

The biggest risk for contagion, in our view, is that the Greek “no” vote would most likely set in motion two precedents – an exit and default of official sector debt – that have never really been stress tested in the euro zone, either technically, or perhaps more importantly, politically.

Greek default would have a non-negligible effect on EA balance sheets…

As we have said in the past, a default on official sector debt would be large, but technically manageable, at about EUR195bn in bilateral loans and EFSF/ESM loans. In addition, SMP bonds held by the ECB amount to EUR27.7bn and Intra Eurosystem liabilities (mainly Target 2) amount to EUR118bn. Altogether, the official exposure to Greece amounts to about EUR340bn, nearly 3.5% of EA’s GDP, sizeable but probably manageable [ZH: and enough to push the Eurozone into a depression if the entire liability is written off].

... while a default opens up a host of political risks that remain unanswered

A default on the European loans could create considerable political backlash in EA countries against further support for periphery economies. Right-wing parties, such as AfD in Germany, Front National in France, Party of Freedom in the Netherlands, and True Finns in Finland, have repeatedly opposed bail-outs to periphery countries, especially to Greece. But even more moderate parties may question the bail-out mechanisms as the Greek default of 2012 was meant to be a one-off. Smaller countries are also unlikely to take it lightly as; as a percentage of their country GDPs, these countries would bear a larger share of the burden (eg, the Baltic countries).

All of this puts into perspective today's ECB decision to raise Greek haircuts, because as Goldman noted two weeks ago, it appears to have ultimately been the ECB's intention to launch a controlled Grexit contagion, one where Europe will see a steep but not too dramatic drop in its GDP, and perhaps a triple-dip recession can be avoided once more with some new changes in the definition of what GDP is, all so Mario can pull a Kuroda from October 31, 2014 and increase the ECB's QE just so European stocks rise higher, and just as importantly, the EUR slides even more (some 7 figures according to Goldman) toward parity which make both Europe's - really Goldman's - bankers delighted when gettting their year end bonus, and keep Germany's exporters happy.

As for the collateral damage, i.e., millions of broke Greeks who just lost everything, you know what they say about making a QE omelette.

Curiously, the German government hasn’t published estimates of how much it could lose in case of a default, arguing that this scenario could unfold in too many different ways. However, as the WSJ reports, according to the Munich-based Ifo economic institute, total German exposure to Greece, including the loans and a host of other liabilities, at €88 billion while S&P estimates it at €91 billion. This is in line with the estimate shown above.

According to Jens Boysen-Hogrefe, economist with Kiel-based institute Ifo, the hit “would hardly be noticeable for Germans." He may be right, but where he is wrong is looking at Greece as an isolated case: since Europe is, or rather was, a union, one has to evaluate the combined impact of a third of a trillion in impaired assets across the Eurozone. For the vast majority of European nations, the effect of a "write-off" of 3-4% of GDP would be sufficient to launch a depression, which would then promptly drag Germany lower as well, adverse impact (and thus quite welcome to Germany) on the EUR notwithstanding.

We just hope that the ECB has done its math right and what it believes will be the contained demolition of Greece does not spiral out into an out of control tumble of dominoes, because not even a hollow "whatever it takes" threat from Draghi would offset that, especially if and when the deposit run moves from Greece to Italy, Spain and the rest of the Europe.

The impact of a full-blown financial crisis in China, if it materializes, on the economy would likely be severe. On corporate earnings, other than the drag from slower growth, many companies may have to book stock-market related losses over the next few quarters by our assessment. Stock lending related losses could run into Rmb trillions.

Over the past two weeks, China has resorted to an eye-watering array of policy maneuvers and pronouncements in a desperate attempt to resurrect the country's margin-fueled equity bubble. Amid the chaos, Morgan Stanley — whose "don't buy this dip" call might well have been the straw that broke the dragon's back, so to speak — is out with a detailed history of Beijing's plunge protection playbook.

Chinese investor psychology has shifted. Period. The more the government intervenes to lift stock prices explicitly, the more local and professsional leveraged investors will use any strength to unwind their positions (profitably or unprofitably). The question is - when does this carnage stop?

When it comes to Greece, and Europe in general, "hope" continues to remain the driving strategy. As Bloomberg's Richard Breslow summarizes this morning, "if you were looking for a word to describe the general feeling of equity markets today, you might well pick hopeful. U.S. equity futures opened higher and have been up all day. European bourses opened cautiously higher as they await word, any word, from the European finance ministers or more importantly, Chancellor Merkel. Equity markets will continue to be very reactive to European headlines, but so far, no news has been taken as a reason for hope." Which incidentally, has been the general investment case for the past 6 years: "hope" that central banks know what they are doing.

Despite all the hopes and prayers of illiterate farmers everywhere, Chinese stocks refuse to hold a bid and down 3-4% at the open amid suspension of around 160 individual securities. In the pre-open to open, Shanghai Composite is down 3.2%, Shenzhen is off 3.5%, and China's Nasdaq - ChiNext is down 3.8%. This leaves ChiNext down over 40% from its highs as the cost of insuring downside in Chinese stocks explodes to record highs. As China goes through the 1929 playbook to save its 'market', it appears "momentum" has shifted.

What do you do when two policy rate cuts, $19 billion in committed support from a hastily contrived broker consortium, and a promise of central bank funding for the expansion of margin lending all fail to quell extreme volatility in a collapsing equity market? You ban selling.

In this centrally-planned world, in which nobody even denies anymore that all markets have become central banker playthings, fundamentals are irrelevant and few have a clue what this latest crash in copper may signify (some do, and it isn't pretty) an even more disturbing clue for the fate of this erstwhile "market doctor" is revealed when looking at the long-term price chart. Here, as SocGen notes, copper is in danger of breaching a huge 15 year support line... after which it is free fall for a long, long time.

On the heels of a weekend which saw Beijing launch a series of ad hoc policy maneuvers designed to stop the bleeding in China's equity markets, the SHCOMP opened sharply higher Monday only to give back half of its opening gains minutes later in a preview of what will likely be a week of unprecedented volatility as panicked housewives and banana vendors looking to sell the rips battle the PBoC for control of China's stock market mania.

"The A-share market may not bottom until the government, possibly via the PBoC, becomes the buyer of the last resort. It seems that the government might have just taken the first step in that direction on Sunday night with PBoC’s promise to provide liquidity support to stabilize the market. If PBoC becomes the main source of market-supporting liquidity, we expect the central bank's credibility to be hurt."

On Sunday, the China Securities Regulatory Commission announced that the PBoC is set to inject capital into China Securities Finance Corp which will use the funds to help brokerages expand their businesses and reinvigorate stocks. In other words, the PBoC is now in the business of financing leveraged stock buying.

China has moved in the direction of direct intervention in its flagging equity markets, although it appears Beijing will try to orchestrate a “private” sector (whatever that means in China) solution first before going the nuclear route with the central bank’s balance sheet. As Bloomberg reports, the country’s largest brokerages are teaming up to invest nearly $20 billion in “blue chip” Chinese equities.

China has moved in the direction of direct intervention in its flagging equity markets, although it appears Beijing will try to orchestrate a “private” sector (whatever that means in China) solution first before going the nuclear route with the central bank’s balance sheet. As Bloomberg reports, the country’s largest brokerages are teaming up to invest nearly $20 billion in “blue chip” Chinese equities.

The Greece impasse set to culminate on Sunday continues to have a massive impact on at least one stock market, unfortunately it is the wrong one, located on a continent which is mostly irrelevant to the future of the Greek people (unless that whole AIIB bailout does take place of course). We are, of course, talking about China which as noted earlier, started off horribly, plunging over 7% with over 1000 stocks hitting 10% limit down, then in the afternoon session mysteriously recovering all losses and even trading slightly higher on the day, before the late selling returned once more, and the Shanghai Composite plunged to close down 5.8%: an unimaginable 20% total roundtrip move!

As one local reporter put it, despite being told not to say anything negative, "the government appeared to have lost its ability to manage the market."Chinese stocks are down 4-5% at the open, pressing new cycle lows with Shenzhen and CHINEXT now down 25% from last week. As The South China Morning Post reports, many investors said the government was at least partly to blame for the collapse because it encouraged them to go into the market - for months, state-owned media have issued daily commentaries to encourage people to load up on shares.

If it was Greece's intention to crush the Chinese stock market instead of Europe's, well - it succeeded. Because despite the PBOC and politburo throwing everything but QE at the stock market, China stocks closed down sharply on Thursday after another wild trading day as investors shrugged off regulators' intensified efforts to put a floor under the sliding market, by cutting trading fees and easing margin rules, which has now crashed 25% in about two weeks wiping out $2.5 trillion of the peak $10 trillion in Chinese stock market cap as of June 14. This ultimately resulted with the Shanghai Composite closing under 4000 for the first time since April.

Despite more liquidity injections (CNY35 billion 7day RevRepo), archaic deals for brokerages to manipulate their balance sheets, and local reporters noting China's propaganda ministry ordering state media to publish only positive opinions about the stock market, not to criticize, Chinese stocks are in red once again. The record streak of margin debt declines continues and although futures were driven up early on, any strength has been sold into as unwinds wreak havoc on the ponzi wealth creation scheme. All major indices are in the red with Shenzhen (home of the 500%-club) the worst, down around 2% (though as CNBC would say "off the lows").

"The selling pressure so far has mainly come from stock-related borrowings via various unofficial channels where the leverage is much higher," BofAML says of the dramatic sell-off in Chinese equities. On Wednesday, the country's securities regulator moved to reassure markets as the unwind of hundreds of billions in leveraged trades threatens to collapse China's world-beating stock bubble.

Following the much-celebrated (and massive 13% swing low-to-high) bounce yesterday at the hands of a desperate PBOC, the morning session ended with an early boost fading. Shanghai margin debt has now suffered the longest streak of declines in 3 years and as BofAML warned they "doubt that this marks the end of the de-leveraging process in the stock market given that much of the leveraged positions are yet to unwind." With both Manufacturing and Services PMIs printing above 50, stimulus is now clearly aimed at maintaining the bubble but as BofAML concludes, "after this adverse experience, we expect many investors will be much more cautious before investing into the stock market, we will be surprised to see a return of the unbridled enthusiasm of investors any time soon."

The relentless, limit-down trading in Chinese stocks that unfolded last week and continued into Monday (despite the PBoC's best efforts to arrest the slide with an emergency rate cut) has wreaked havoc on China's rookie money managers and their unsuspecting clients with losses amounting to as much as 80% in some structured funds.

Having thrown the kitchen sink at their collapsing ponzi-scheme of a market in the past two days, only to see stocks open and crash once again overnight, it appears The PBOC went full intervention-tard in the middle of the morning session. With CHINEXT down over 7% and Shnghai down over 4%, the manipulation was rooted in CSI-300 futures as while cash markets saw margin calls and liquidation, futures were surging. By the close China's 'Nasdaq' had ripped 13% off its lows and the broad market's intrday swing was the largest since 1992... The PBOC's got your back.

In the last 2 days, PBOC has thrown everything at the ponzi-fest they call a rational market. An RRR cut, a Benchmark rate cut, a rev repo rate cut, a CNY50 Bn rev repo injection, a stamp duty cut, IPO halts (cut supply), and last but not least permission to speculate with a reassurance that shares on a solid foundation. The outcome of all this policy-panic - CHINEXT (China's Nasdaq) is down another 6% today (down 25% in 3 days) and aside from CSI-300 futures, all other major Chinese indices are in free-fall. Add to that the fact that industrial metals are collapsing with steel rebar limit down and it appears Central Bank Omnipotence is under threat.

Because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply.

After soaring exponentially over 100% in the past 12 months, amid spiking margin debt for illiterate farmers and housewives, Chinese regulators appear upset that their stock market 'wealth creation' model is failing hard. CSRC just released a statement clarifying why it is happening ("clearly profit-taking"); who is to blame ("The Government hopes investors can make independent judgement; Don't believe or follow negative rumors against Chinese economic development,"); and what to do next - Buy because it has "ample liquidity to meet investor needs." The regulator ends with a stunner - demanding investors "act rationally."

For the first time since October, 2008, China cuts both the benchmark lending rate and RRR on the same day, in a frantic attempt to sustain the country's equity bubble after stocks collapsed to the edge of bear market territory on Friday.

"As this critical domino chain of local governments in China’s credit risk situation begins to wobble, there could be significant ramifications for broad financial market stability. Such a chain reaction seems to have begun."

Following yesterday's furious market drop in Chinese stocks, just before the overnight open, Morgan Stanley came out with a much distributed report urging investors "Not to buy this dip", and so they didn't. As a result, the Shanghai Composite imploded, at one point trading down 8% while the Chinext and Shenzhen markets crashed even more. This was the single biggest Shanghai Composite one-day drop since 2007, and with a close at 4192.87 the SHCOMP is now on the verge of a bear market, down 19% from its June 12 highs. China's second largest market, Shenzhen, is now officially in a bear market.

China's margin loan balance sits at around CNY2.2 trillion, and while that’s certainly impressive, there’s every reason to believe that at least another CNY500 billion in margin lending has been funneled into the Chinese stock market via the country’s shadow banking complex. As regulators tighten the screws on shadow margin lending, are stocks in for a rude awakening?

Surely the “world-beating” Chinese equity rally and the paper profits it’s generated have had a decisively positive effect on the spending habits of the millions of housewives and banana vendors who have pyramided borrowed money into small fortunes. Or maybe not...

Just when you thought it was safe to buy the 12% collapse (the biggest since Lehman) in Chinese stocks, they re-plunge another 3-4% with no dip-buyers evident. The drivers are twofold: first, China PMI beat expectations modestly (uh oh no more QDII, QE, PSL, etc.); and second - and much more critically - The PBOC Operations Office has called for stricter regulation of brokerage liquidity (implicitly clamping down on the seemingly infinite expansion of margin lending required to fuel the boom). CHINEXT has entered a bear market (down 21.5%) and the rest of the Chinese complex is down 3-5% today (down 15-20% from the highs).

As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week - the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%). To put this in context, Chinese stocks lost almost $1 trillion in market cap last week - 10% of its GDP!

What the stock bubble shows is the unthinkable degree of difficulty in trying to actually manage letting air out of any bubble in an orderly fashion. It may already be too late, as growth declines still further month by month, but stock prices go even more insane, drawing in more and more “retail” accounts and regular Chinese. In other words, the reform idea may have been impossible from the start; that the PBOC went ahead anyway, and still continues despite all that has happened, more than suggests that they now recognize the most dangerous existence is asset bubbles, far and away more important than even “necessary” growth.

As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week - the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%). To put this in context, Chinese stocks lost almost $1 trillion in market cap last week - 10% of its GDP!

In A World Of Artificial Liquidity – Cash Is King

Global central banks are afraid. Before Greece tried to stand up to the Troika, they were merely worried. Now it’s clear that no matter what they tell themselves and the world about the necessity or even righteousness of their monetary policies, liquidity can still disappear in an instant. Or at least, that’s what they should be thinking.

The Federal Reserve and US government led policy of injecting liquidity into the US and then into the worldwide financial system has resulted in the issuance of trillions of dollars of debt, recycling it through the largest private banks, and driving rates to 0% -- or below. The combined book of debt that the Fed and European Central Bank (ECB) hold is $7 trillion. None of that has gone remotely into fixing the real global economy. Nor have the banks that have ben aided by this cheap money increased lending to the real economy. Instead, they have hoarded their bounty of cash. It’s not so much whether this game can continue for the near future on an international scale. It can. It is. The bigger problem is that central banks have no plan B in the event of a massive liquidity event.

These “emergency” measures were supposed to have healed the problems that caused the financial crisis of 2008 -- the excessive leverage, the toxic assets wrapped in complex derivatives, the resultant credit and liquidity crunch that occurred when banks lost faith in each other. Meanwhile, the infusion of cheap money and liquidity into banks gave a select few of them more power over a greater pool of capital than ever. Stock and bond markets skyrocketed as a result of this unprecedented central bank support.

QE-infinity isn’t a solution -- it’s a deflection. It’s a form of financial subterfuge that causes extra problems. These range from asset bubbles to the inability of pension and life insurance funds to source longer term less risky long-term assets like government bonds, that pay enough interest for them to meet liabilities. They are thus at risk of rapid future deterioration and more shortfalls precisely because they have nothing to invest in besides more risky stock and lower-rated bond markets.

Even the latest Bank of International Settlement (BIS) 85th Annual Report revealed the extent to which global entities supervising the banking system are worried. They harbor growing fears about greater repercussions from this illusion of market health (echoing concerns I and others have been writing about for the past seven years.)

The BIS, or bank for the central banks was established during the global Great Depression in 1930 in Basel, Switzerland, when bank runs on people’s deposits were the norm. The body no longer buys into zero-interest rate policy as an economic cure-all. In their words, “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the remarkable symptom of a broader malaise in the global economy.”

They go on to note the obvious, “The economic expansion is unbalanced, debt burdens and financial risks are still too high, productive growth too low, and the room for maneuvering in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal.”

These are troubling words coming from an organization that would have much preferred to deem central bank policies a success. Yet the BIS also states, “Global financial markets remain dependent on central banks.” Dependent is a strong word. How quickly the idea of free markets has been turned on its head.

Further, the BIS says, “Central bank balance sheets remain at unprecedented high levels; and they grew even larger in several jurisdictions where the ultra low policy rate environments were reinforced with large purchases of domestic and foreign assets.”

Central banks are not yet there, but rising volatility is indicative of the accelerating approach to the nowhere left to go mark from a monetary policy perspective. This, after seven years of a reckless Anti-Main Street, inequality and instability inducing, policy.

Not only have the major banks been the main recipient of manufactured liquidity, they have also received consolidated access to our deposits, which they can use like hostages to negotiate future bailout situations. Elite bankers moan about the extra regulations they have had to endure in the wake of the financial crisis, while scooping up cash dispersed under the guise of stimulating the general economy.

Central banks seek fresh ways to keep the party going as countries like Greece shut down banks to contain capital flight, and places like Puerto Rico and multiple states and municipalities face economic ruin. But they are clueless as to what to do.

In this cauldron of instability and lack of leadership, cash is the one remaining financial possession that Main Street can translate into goods, services and security. That’s why private banks want more control over it.

Banks Want Your Cash For Their Latent Emergencies

One of the most inane reasons cited for restricting cash withdrawals for normal people is that they all might turn out to be drug dealers or terrorists. Meanwhile, drug-dealing-money-laundering terrorists tend to get away with it anyway, by sheer ability to use a plethora of banks and off shore havens to diffuse cash around the globe.

Every so often, years after the fact, some bank perpetrators receive money-laundering fines. For average depositors though, these are excuses for a bureaucracy built upon limiting access to cash whether from an ATM (many have $500 per day limits, some have less) or an account (withdrawals above a certain level get reported to the IRS).

As Charles Hugh Smith wrote at Peak Prosperity recently, there’s a difference between physical cash (the kind you can touch and use immediately) and the electronic kind, associated with your bank balance or credit card cash advance limit. If you hold it, you have it – even if keeping it in a bank means it’s probably slammed with various fees.

Banks, on the other hand, can leverage your deposits or cash, even while complying with various capital reserve requirements. That’s not new. But the expanding debates about how much of your cash you get to withdraw at any given moment, is.

The notion of a bail-in, or recourse to people’s deposits, is related to the idea of restricting the movement, or existence, of physical cash. Bail-ins, like any cash limitations, imply that if a bank needs emergency liquidity, your deposits are the place to find it, which has negative repercussion on your own solvency. This is exactly what the Glass-Steagall Act of 1933, coupled with the creation of the FDIC sought to avoid – banks confiscating your money at the worst possible times.

The ‘war on cash’ is thus really a war on the difference between the money you can hold on to and the money the banks can take away from you. The existence of this cash debate underscores the need for a personal policy of cash extraction from the big banks. Do you have one?

In Part 2: They're Coming For Your Cash we detail out the growing threats to the liquidity that sustains the modern global banking system, and why it's more crucial than ever for people to consider extracting a portion of cash from their bank accounts. As existing liquidity streams dry up (as they are beginning to around the world), increasingly desperate banks will turn to the largest and most convenient source they know of: the collective cash savings we have on deposit with them.

Sounding the Alarmon Financial Repression

Swiss Re video highlights the recent meeting they held with experts voicing concerns about the ongoing use of unconventional policies .. financial repression is causing financial market distortions & poses a serious risk to financial stability .. These unconventional policies have pushed institutional investors into holding government debt. As a result they have less money available for productive investment, such as infrastructure projects .. "It means that there's a global search for yield. That possibly leads to a misallocation of resources," says Douglas Flint, Group Chairman of HSBC .. Jean-Claude Trichet, Chairman of theGroup of Thirty affirms the risks.

Swiss Re: Financial Repression has cost U.S. Savers $470 Billion

Swiss Re report highlights how artificially low interest rates have cost U.S. savers U.S.$470 Billion .. the report also explains how financial repression has exacerbated wealth/income inequality .. Swiss Re has also crafted a "Financial Repression Index" - see above .. "Looking ahead, financial repression is likely to remain a key tool for policymakers given the moderate global growth outlook and high public debt overhang. But, as outlined in this paper, financial repression comes with significant costs. Whether the costs outweigh the benefits largely depends on the ability of governments to take advantage of the low interest rate environment by implementing the right structural reforms. So far, their record for doing so has not been comforting, as also noted by the IMF .. Additional research on financial repression could be linked to the impact of an aging society on the broader economic and financial market environment and hence the optimal policy mix. Finally, a largely unexplored area is the consequence – especially longer-term – of public authorities acting as dominant players in their own bond markets. How does this affect private capital markets, and how severe are the distortions in price formation, investment decisions, allocation to productive areas and capital flows more generally?" .. the report includes a Foreward bySwiss Re Group Chief Investment Officer Guido Fürer.

Tipping Points Life Cycle - ExplainedClick on image to enlarge

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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